This Is The ‘Go-To’ ETF For Tactical Purposes In Oil

"The bigger picture context is that investors need to be aware that different ETFs are used for different purposes. Frequently, there is one ETF which becomes the “goto” vehicle for tactical purposes for a given market segment. Within Energy, XOP has emerged as that vehicle."

Ok, so Citi is out with something pretty interesting on XOP. So far this year, Energy equity has been more adept at pricing in risk from gyrations in crude prices than Energy credit. This probably reflects the extent to which credit markets are still distorted by the never-ending, central-bank inspired hunt for yield. And indeed, this dynamic is exacerbated when supply dries up, as investors clamor for whatever there is to get, thus providing a demand-side technical that supports further spread compression. Over the past two months, HY Energy issuance essentially flat-lined. You can plausibly attribute that development to no one needing to refi if you like, but it's worth noting that spreads are becoming more responsive to crude, which suggests the environment is becoming less favorable - if only slightly so: In any event, the point is that equities are probably a better barometer of market sentiment when it comes to how everyone is trying to price the outlook for crude prices. And when it comes to equities, Citi thinks XOP is perhaps "the most relevant US listed ETF for assessing energy stock read-throughs." That makes sense from a sort of high-level, common sense perspect
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1 comment on “This Is The ‘Go-To’ ETF For Tactical Purposes In Oil

  1. John Watts says:

    Pretty insightful. Question regarding 200% short interest vs float… so apparently there was a ton of naked short selling (even still if ‘only’ near 100% float), and this is justified because the ETF can just create new shares if redeemed. Fine. But 200% of float?? Am I missing something here? This just seems extremely reckless. I would love to see the effect of a large move causing massive redemptions and having ETF managers scrambling around like chickens with their heads cut off.

    Why the fuck not just sell futures if the aim is hedge?

    …and as I just finished writing that, it just clicked that it’s likely just the institutional boys trying to magnify returns by offloading to the retail crowd. Because of course. Obviously other dynamics at play, but I suspect at a high level that’s the logic behind that.

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